Investments

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Investments
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Investments
Investments in Equity Securities
Investments in Debt Securities

• Holdings of less than 20
• Held-to-maturity securities
• Available-for-sale securities
• Trading securities
• Holdings between 20 and 50
• Holdings of more than 50

• Held-to-maturity securities
• Available-for-sale securities
• Trading securities

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Investments in Debt Securities
Accounting for Debt Securities by Category
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Held-to-Maturity Securities

• Classify a debt security as held-to-maturity only
  if it has both
• the positive intent and
• the ability to hold securities to maturity.

Accounted for at amortized cost, not fair
value. Amortize premium or discount using the
effective-interest method unless the
straight-line methodyields a similar result.
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Available-for-Sale Securities

• Companies report available-for-sale securities at
  
• fair value, with
• unrealized holding gains and losses reported as
  part of comprehensive income (equity).
• Any discount or premium is amortized.

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Available-for-Sale Securities
Sale of Available-for-Sale Securities

• If company sells bonds before maturity date
• Must make entry to remove the,
• Cost in Available-for-Sale Securities and
• Securities Fair Value Adjustment accounts.
• Any realized gain or loss on sale is reported in
  the Other expenses and losses section of the
  income statement.

LO 2 Understand the procedures for discount and
premium amortization on bond investments.
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Trading Securities

• Companies report trading securities at
• fair value, with
• unrealized holding gains and losses reported as
  part of net income.
• Any discount or premium is amortized.

LO 2 Understand the procedures for discount and
premium amortization on bond investments.
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Trading Securities

• Pete Sampras Corporation purchased trading
  investment bonds for 40,000 at par. At December
  31, Sampras received annual interest of 2,000,
  and the fair value of the bonds was 38,400.
• Instructions
• Prepare the journal entry for the purchase of the
  investment.
• Prepare the journal entries for the interest
  received.
• Prepare the journal entry for the fair value
  adjustment.

LO 2 Understand the procedures for discount and
premium amortization on bond investments.
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Trading Securities
BE17-4 Prepare the journal entries for (a) the
purchase of the investment, (b) the interest
received, and (c) the fair value adjustment.
(a) Trading securities 40,000
Cash 40,000
(b) Cash 2,000
Interest revenue 2,000
(c) Unrealized Holding Loss - Income 1,600
Trading Securities 1,600
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Investments in Equity Securities

• Represent ownership of capital stock.
• Cost includes
• price of the security, plus
• brokers commissions and fees related to
  purchase.
• The degree to which one corporation (investor)
  acquires an interest in the common stock of
  another corporation (investee) generally
  determines the accounting treatment for the
  investment subsequent to acquisition.

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Investments in Equity Securities
Ownership Percentages

• 0 --------------20 ------------ 50
  -------------- 100

No significant influence usually exists
Significant influence usually exists
Control usually exists
Investment valued using Fair Value Method
Investment valued using Equity Method
Investment valued on parents books using Cost
Method or Equity Method (investment eliminated in
Consolidation)
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Holdings of Less Than 20
Accounting Subsequent to Acquisition
Market Price Available
Market Price Unavailable
Value and report the investment using the fair
value method.
Value and report the investment using the cost
method.
Securities are reported at cost. Dividends are
recognized when received and gains or losses only
recognized on sale of securities.
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Holdings of Less Than 20
Accounting and Reporting Fair Value Method
Because equity securities have no maturity date,
companies cannot classify them as
held-to-maturity.
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Holdings of Less Than 20
Loxley Company has the following portfolio of
securities at September 30, 2007, its last
reporting date.
On Oct. 10, 2007, the Fogelberg shares were sold
at a price of 54 per share. In addition, 3,000
shares of Los Tigres common stock were acquired
at 59.50 per share on Nov. 2, 2007. The Dec. 31,
2007, fair values were Petra 96,000, Los Tigres
132,000, and the Weisberg common 193,000.
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Holdings of Less Than 20
Portfolio at September 30, 2007
Securities Fair Value Adjustment -
credit (19,000)
Unrealized holding loss - income 19,000
Trading Securities 19,000
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Holdings of Less Than 20
Prepare the journal entries to record the sale,
purchase, and adjusting entries related to the
trading securities in the last quarter of 2007.
October 10, 2007 (Fogelberg)
Cash (5,000 x 54) 270,000
Trading securities 200,000
Gain on sale 70,000
November 2, 2007 (Los Tigres)
Trading securities (3,000 x 59.50) 178,500
Cash 178,500
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Holdings of Less Than 20
Portfolio at December 31, 2007
December 31, 2007
Unrealized holding loss - income 76,500
Trading Securities 76,500
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Holdings of Less Than 20
How would the entries change if the securities
were classified as available-for-sale?

• The entries would be the same except that the
• Unrealized Holding Gain or LossEquity account is
  used instead of Unrealized Holding Gain or
  LossIncome.
• The unrealized holding loss would be deducted
  from the stockholders equity section rather than
  charged to the income statement.

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Holdings of Less Than 20
Loxley Company has the following portfolio of
securities at September 30, 2007, its last
reporting date.
On Oct. 10, 2007, the Fogelberg shares were sold
at a price of 54 per share. In addition, 3,000
shares of Los Tigres common stock were acquired
at 59.50 per share on Nov. 2, 2007. The Dec. 31,
2007, fair values were Petra 96,000, Los Tigres
132,000, and the Weisberg common 193,000.
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Holdings of Less Than 20
Portfolio at September 30, 2007
Securities Fair Value Adjustment -
credit (19,000)
Unrealized holding loss - equity 19,000
Available for sale Securities 19,000
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Holdings of Less Than 20
Prepare the journal entries to record the sale,
purchase, and adjusting entries related to the
trading securities in the last quarter of 2007.
October 10, 2007 (Fogelberg)
Cash (5,000 x 54) 270,000
Avail. For sale securities 200,000
Gain on sale 45,000
Unrealized holding loss equity
25,000
November 2, 2007 (Los Tigres)
Avail. For sale securities(3,000 x 59.50) 178,500
Cash 178,500
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Holdings of Less Than 20
Portfolio at December 31, 2007
December 31, 2007
Unrealized holding loss - income 76,500
Avail. For sale securities 76,500
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Financial Statement Presentation
Report trading securities at aggregate fair value
as current assets. Report held-to-maturity and
available-for-sale securities as current or
noncurrent.
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Holdings Between 20 and 50
An investment (direct or indirect) of 20 percent
or more of the voting stock of an investee should
lead to a presumption that in the absence of
evidence to the contrary, an investor has the
ability to exercise significant influence over an
investee. In instances of significant
influence, the investor must account for the
investment using the equity method.
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Holdings Between 20 and 50
Equity Method

• Record the investment at cost and subsequently
  adjust the amount each period for
• the investors proportionate share of the
  earnings (losses) and
• dividends received by the investor.

If investors share of investees losses exceeds
the carrying amount of the investment, the
investor ordinarily should discontinue applying
the equity method.
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Holdings Between 20 and 50
On January 1, 2007, Pennington Corporation
purchased 30 of the common shares of Edwards
Company for 180,000. During the year, Edwards
earned net income of 80,000 and paid dividends
of 20,000. Instructions Prepare the entries for
Pennington to record the purchase and any
additional entries related to this investment in
Edwards Company in 2007.
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Holdings Between 20 and 50
Prepare the entries for Pennington to record the
purchase and any additional entries related to
this investment in Edwards Company in 2007.
Investment in Associates 180,000
Cash 180,000
Investment in Associates 24,000
Investment Revenue 24,000
(80,000 x 30)
Cash 6,000
Investment in Associates 6,000
(20,000 x 30)
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Holdings of More Than 50

• Controlling Interest - When one corporation
  acquires a voting interest of more than 50
  percent in another corporation
• Investor is referred to as the parent.
• Investee is referred to as the subsidiary.
• Investment in the subsidiary is reported on the
  parents books as a long-term investment.
• Parent generally prepares consolidated financial
  statements along with its solo financial
  statements.

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Investments at the Date of Acquisition
Recording Investments at Cost (Parents Books)

• Stock investment is recorded at cost as measured
  by fair value of the consideration given or
  consideration received, whichever is more clearly
  evident.
• Consideration given may include cash, other
  assets, debt securities, stock of the acquiring
  company.

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Investments at the Date of Acquisition
Exercise On January 1, 2008, Polo Company
purchased 100 of the common stock of Save
Company by issuing 40,000 shares of its (Polos)
10 par value common stock with a market price of
17.50 per share. The stockholders equity
section of the two companys balance sheets on
December 31, 2007, were Common stock, 10 par
value 350,000 320,000 Other contributed
capital 590,000 175,000 Retained earnings
380,000 205,000
Polo
Save
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Investments at the Date of Acquisition
Exercise Prepare the journal entry on the books
of Polo Company to record the purchase of the
common stock of Save Company and related expenses.
Investment in Save (40,000 x 17.50) 700,000
Common Stock 400,000
Other Contributed Capital 300,000
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Consolidated Balance Sheets Use of Workpapers
Assets and liabilities are summed, regardless of
whether the parent owns 100 or a smaller
controlling interest.

• Minority interests are reflected as a component
  of owners equity.
• Eliminations must be made to cancel the effects
  of transactions among the parent and its
  subsidiaries.
• A work-paper is frequently used to summarize the
  effects of various additions and eliminations.

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Consolidated Balance Sheets Use of Workpapers
Intercompany Accounts to Be Eliminated
Parents Accounts
Subsidiarys Accounts
Investment in subsidiary
Equity accounts
Against
Intercompany receivable (payable)
Intercompany payable (receivable)
Against
Advances to subsidiary (from subsidiary)
Advances from parent (to parent)
Against
Interest revenue (interest expense)
Interest expense (interest revenue)
Against
Dividend revenue (dividends declared)
Dividends declared (dividend revenue)
Against
Management fee received from subsidiary
Management fee paid to parent
Against
Sales to subsidiary (purchases of inventory from
subsidiary)
Purchases of inventory from parent (sales to
parent)
Against
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Consolidated Balance Sheets Use of Workpapers
Illustration Assume that on January 1, 2007, P
Company acquired all the outstanding stock
(10,000 shares) of S Company for cash of
160,000. What journal entry would P Company
make to record the shares of S Company acquired?
Fair value Book valuePurchase Price
Price paid 160,000 acquired 100 Fair value
160,000 Book value 160,000 Difference 0
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Consolidated Balance Sheets Use of Workpapers
Adjusting and eliminating entries are made on the
workpaper for the preparation of consolidated
statements.
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Consolidated Balance Sheets Use of Workpapers
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Consolidated Balance Sheets Use of Workpapers

• The investment account and related subsidiarys
  stockholders equity have been eliminated and the
  subsidiarys net assets substituted for the
  investment account.
• Consolidated assets and liabilities consist of
  the sum of the parent and subsidiary assets and
  liabilities in each classification.
• Consolidated stockholders equity is the same as
  the parent companys equity.

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Consolidated Balance Sheets Use of Workpapers
Purchase Cost Exceeds Fair Value of Subsidiary
Companys EquityPartial Ownership.
Illustration Assume that on January 1, 2007, P
Company acquired 80 (8,000 shares) of the stock
of S Company for 148,000. What journal entry
would P Company make to record the shares of S
Company acquired?
Investment in S Company 148,000
Cash 148,000
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Consolidated Balance Sheets Use of Workpapers
The balance sheets of both companies immediately
after the acquisition of shares is as follows
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Consolidated Balance Sheets Use of Workpapers
The work-paper to consolidate the balance sheets
for P and S on Jan. 1, 2007, date of acquisition,
is presented below
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Consolidated Statements After Acquisition
Year of Acquisition
On January 1, 2007, Parker Company purchased 95
of the outstanding common stock of Sid Company
for 160,000. At that time, Sids stockholders
equity consisted of common stock, 120,000 other
contributed capital, 10,000 and retained
earnings, 23,000. Required A. Prepare a
consolidated statements workpaper on Dec. 31,
2007.
LO 3 Use of workpapers.
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Consolidated Statements After Acquisition
On December 31, 2007, the two companies trial
balances were as follows at right Required A.
Prepare a consolidated statements workpaper on
December 31, 2007.
LO 5 Workpapers eliminating entries.
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Consolidated Statements After Acquisition
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Consolidated Statements After Acquisition